Property settlement following a divorce or relationship breakdown is rarely simple. When a farm is involved, things can get even more complex.
Farms are largely now treated in the same way as any other property settlement to ensure an equitable division of property.
Senior Associate in Mellor Olsson's family law team, Nestoras Alexandropoulos, who regularly assists clients in the Clare Valley region with family law based matters, says some of the things the court will consider include:
- How the farm came to form part of the asset pool? For example, was it purchased or inherited and when did this occur?
- What role did each party play in the farm? For example, did both parties work on the farm and were they properly paid for that work?
- The business structure of the farming enterprise? For example, is the farm run as a partnership or run through a family trust? Is there one entity or multiple entities of the parties using the same farming land? Who is benefiting from the income generated by the farm?
- The value of the farming land, the farming enterprise and/or the farming plant/equipment
- How has the income generated by the farm and/or the farming plant/equipment been accounted for in the books and have tax and other liabilities been accounted for?
Mr Alexandropoulos says something he has seen cropping up more frequently in property settlements involving farms are equitable interest claims. "Usually farming is a family affair," he said. "For example, farming land and/or plant and equipment is shared between parents and children or a farm has been kept in a family for multiple generations. When separation occurs this can result in a party making an equitable interest claim. An equitable interest claim arises when there is an interest in the property, but no legal title exists. Such an interest could arise when a party has spent considerable time or money on another person's land under an expectation created or encouraged by the owner of the land that they may be able to stay there or that the land will one day be transferred to them."
As an example: John Deere Junior and Shirley were married for 20 years, however they have recently separated. John Junior has farming land registered in his sole name where he grows crops (being legumes) and runs livestock (being cattle - Farm A). He is a fourth generation farmer who purchased Farm A 20 years ago when he married Shirley.
John Junior's father, John Senior, also owns farming land in his sole name with a home on the land ('Farm B'). When John Junior and Shirley married, John Senior allowed them to live in the house on Farm B rent free. When they first moved into the house John Senior promised the house and Farm B to John Junior and Shirley one day in the future.
As a result of this promise, John Junior and Shirley renovated the house on Farm B spending $45,000 on an extension, air conditioning and new plumbing paid for by Shirley through her income.
John Junior and Shirley could have an equitable interest in Farm B and as part of a property settlement, Shirley could make a claim against John Senior seeking that Farm B be included in the property pool available for division by way of a constructive trust.
Seek advice early
Mr Alexandropoulos says every situation is different, but one approach commonly used is to enter into a Binding Financial Agreement prior to or during a relationship/marriage (in the cases of prior to a relationship/marriage this type of agreement is also known as a prenuptial agreement).
This kind of agreement can have provisions to protect the farm in the event of a later separation of the parties.
If someone is going through the unfortunate situation of a separation involving a farm, obtaining proper legal advice early on in the process is the best way to try and avoid a messy situation.
Mr Alexandropoulos said "Not only for the husband and wife separating but also for the families of the parties separating (in circumstances where an equitable interest claim may arise. In terms of matters involving separation we have a dedicated family law team which are able to assist in all legal aspects of the separation process".
"We have experience in matters involving farms and drawing Binding Financial Agreements." "Mellor Olsson also has extensive expertise in the area of succession planning which is important to consider."
"We also have a wills and estates team and commercial team, which are usually required in property settlements involving family farms."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.